An Underwriter plays a crucial role in the capital markets, particularly in the issuance of new securities such as initial public offerings (IPOs) or follow-on public offerings (FPOs). Underwriters are financial intermediaries who assess the risk of issuing new securities and agree to buy them if the public does not purchase them in full. The Securities and Exchange Board of India (SEBI) regulates the role and responsibilities of underwriters to ensure transparency, fairness, and efficiency in the securities market.
SEBI Guidelines on Underwriters:
SEBI, the regulatory authority for securities markets in India, has established comprehensive guidelines to regulate the activities of underwriters. These guidelines are designed to ensure that underwriters act in the best interests of the investors and the market. Below are the key aspects of SEBI guidelines regarding underwriters:
Registration Requirements:
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Mandatory Registration:
According to SEBI guidelines, any entity that wishes to act as an underwriter must be registered with SEBI. This registration is necessary to ensure that only credible and financially sound entities can undertake the role of an underwriter.
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Eligibility Criteria:
To be eligible for registration, the applicant must meet specific criteria set by SEBI, including a minimum net worth requirement. This ensures that the underwriter has the financial capability to absorb the risk associated with underwriting.
Underwriting Agreement:
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Written Agreement:
SEBI mandates that an underwriter must enter into a written agreement with the issuer of securities. This agreement outlines the terms and conditions of the underwriting, including the underwriting commission, the number of securities underwritten, and the obligations of both parties.
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Disclosure of Material Information:
The underwriter is required to disclose all material information regarding the issuer and the issue to SEBI. This is to ensure transparency and to protect the interests of investors.
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Indemnity Clause:
The underwriting agreement typically includes an indemnity clause, where the issuer indemnifies the underwriter against certain risks. SEBI guidelines require that such clauses should not exempt the underwriter from liabilities arising from their own negligence or misconduct.
Obligations and Responsibilities:
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Due Diligence:
Under SEBI guidelines, underwriters are required to conduct thorough due diligence on the issuer and the securities being issued. This includes evaluating the issuer’s financial statements, business model, and market conditions to assess the viability of the issue.
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Risk Assessment:
The underwriter must assess the risk involved in underwriting the issue. SEBI expects underwriters to take a cautious approach and not assume excessive risk that could jeopardize their financial stability.
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Underwriting Commitment:
If the securities are not fully subscribed by the public, the underwriter is obliged to purchase the unsubscribed portion. This commitment ensures that the issuer receives the necessary capital from the issue.
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Disclosure Obligations:
Underwriters must disclose their underwriting obligations and the commission they will earn in the prospectus of the issue. This disclosure is essential for maintaining transparency with potential investors.
Regulatory Oversight and Compliance:
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Reporting Requirements:
SEBI requires underwriters to submit regular reports detailing their underwriting activities, including the securities underwritten, the subscription status, and the risks assumed. These reports help SEBI monitor the market and ensure that underwriters are complying with regulations.
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Penalties for Non-Compliance:
SEBI has the authority to impose penalties on underwriters who fail to comply with its guidelines. This can include fines, suspension of registration, or even debarment from the securities market.
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Inspection and Investigation:
SEBI reserves the right to inspect the books of accounts, records, and documents of underwriters to ensure compliance with its regulations. In cases of suspected misconduct or malpractice, SEBI can initiate investigations and take appropriate action.
Code of Conduct:
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Ethical Standards:
SEBI guidelines prescribe a code of conduct for underwriters, emphasizing the need for integrity, transparency, and professionalism. Underwriters are expected to act in the best interests of the investors and the market, avoiding any conflict of interest.
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Fair Practices:
Underwriters must ensure that their actions do not manipulate the market or mislead investors. SEBI’s code of conduct prohibits any practices that could harm the integrity of the securities market.
Underwriting Commission:
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Commission Structure:
SEBI allows underwriters to charge a commission for their services, which is usually a percentage of the total amount underwritten. The commission rate is determined by market conditions and the level of risk involved in the underwriting.
- Disclosure:
The underwriting commission must be disclosed in the prospectus and other offer documents, providing transparency to investors about the costs associated with the issue.